There's a Minor Upside to Corporate
Downsizing

A s economist Paul Samuelson once put it, a recession is when your neighbor is out of work -- a depression is when you are.

That classic quip helps explain why corporate downsizing has been getting so much attention in the media. Actually, the practice is nothing new, but until the 1990s, when firms cut payrolls, blue-collar workers lost their jobs and their white-collar brethren didn't much care.

But the 1990-91 recession established a new tradition: White-collar positions also got eliminated, and the white-collar-run media suddenly took notice. (Business Week reported a "white-collar recession," even though the overwhelming majority of layoffs in 1990 and '91 still involved bluecollar workers.)

The folklore on Wall Street about corporate downsizing is that firms are far more willing to apply the axe than ever before. The other generally held belief is that when a company announces the intention to lay off workers, the market rewards it by boosting the price of its shares.

But to what extent are any of these stories really true? Based on recent studies, the results are mixed. To begin with, if you just look at the incidence of layoff announcements, you find that nothing has changed: The rate at which Fortune 500 companies issued these public declarations in the 1970s and 1980s is on a par with the 1990s. But the evidence so far does indicate that the cuts are larger than ever, in addition to the fact that white-collar workers are increasingly thrown onto the hit list.

As for the market's reaction to these announcements, the results are also mixed. Nearly half the Fortune 500 companies that publicly state layoff intentions still find that their stock is punished. But a higher percentage than ever before are getting rewarded.

The table and chart on this page tell much of the story.

Ever since the 1981-82 recession, the Bureau of Labor Statistics has been gathering data on workers who lose their jobs. The column in the table called "layoff rate" (the BLS dubs it the "displacement rate") applies strictly to long-tenured workersthose people who lost jobs that they held for at least three years.

Now notice that from 1990 through 1997, the most recent year for which data are available, the layoff rate has generally been declining. The percentage of long-tenured workers suffering this form of displacement stood at 3.3% in 1996-97, down from 4.2% in 1990-91. So at first blush, downsizing is going out of style.

But once you compare these figures with the pattern in the 1980s, then you're able to separate what economists call the cyclical from the secular (long-term) trend. By 1996-97, the economic expansion had pushed the unemployment rate down to 4.5% (first column). And with the tight labor market that rate of joblessness implies, it's no wonder the layoff rate also declined. But now notice that in the 1980s, for any given level of unemployment, the layoff rate was lower. For example, joblessness ran a bit higher in 1988-89 than in 1996-97 (4.7% versus 4.5%), while layoffs were noticeably lower (2.6% versus 3.3%).

Conclusion: Firms are more willing to cut payrolls than they were in the 1980s. Even in good times like these, they still retain some part of their downsizing zeal.

But this finding comes under the heading of a weak positive. It's quite different from the standard view that downsizing is still running strong, for which there's no good evidence at all. In fact, economists Henry S. Farber and Kevin F. Hallock have shown that job-cut announcements from Fortune 500 companies move in tandem with the unemployment rate.

Amazingly, what these tireless scholars were able to do was to take every company that was ever in the Fortune 500 from 1970 through 1997 and then determine from back issues of The Wall Street Journal every time one of these firms announced a reduction in force -- for a tally of 3,878 "RIFs" over the 28 years. They then found that the number of RIFs in each year correlated very well with the jobless rate for that year. In this decade, as joblessness declined, RIFs have also fallen. In fact, by 1997, the last year for which data were available, the RIF -- count stood at a 28-year low of 48.

Farber and Hallock performed another monumental task. Taking each announcement, they determined what impact it had on the share price of the reporting company. As the chart shows, through the 1970s and 1980s, in more than half the cases, the stock did worse. But by the 1990s, this pattern began to change, with more than half the announcements yielding positive results.

Farber and Hallock also found, not surprisingly, that announcements citing such reasons as restructuring, reorganization and cost control generally had a more constructive effect on the share price than those invoking a slump in demand.

(The BLS study, "Worker Displacement in the 1990s," by Steven Hipple, is available at its Website, www.bls.gov. Numbers in the table were prepared especially for this column by Hipple. Farber and Hallock's study, "Have Employment Reductions Become Good News for Shareholders?" can be found on the National Bureau of Economic Research website, www.nber.org ).

" M any districts reported a pickup in wage increases," noted the Federal Reserve Beige Book last week. But Friday's nonfarm payroll survey from the Bureau of Labor Statistics was having none of it.

The BLS recorded a mere 0.1% rise in average hourly earnings for the month of October. This brought the three-month August-October rise in earnings to an annualized 2.7%, down from the 4.3% surge through May-July. The bond market rejoiced at this apparent weakening of wage pressures.

But not so fast. As noted in this column before, there's an ongoing disconnect between wage and salary figures available from state unemployment insurance offices and the BLS estimates. The UI figures imply a much larger jump in earnings than BLS has been reporting, and since they're close to a universal count, they're surely worth heeding.

More to the point, Fed Chairman Greenspan, who knows all and sees all when it comes to economy-wide statistics, must also know about this glaring disparity. Such knowledge might motivate his colleagues to join him in raising the federal funds rate another quarter-point when they meet November 16.

The BLS also reported that nonfarm payrolls rose 310,000 in October, and with small upward revisions to August and September, the three-month average came to a modest gain of 160,000. The unemployment rate ticked down to 4.1%, a 30-year low.

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